What Every Foreigner Needs to Know about Hiring Staff in Japan

Japanese labor law is very different from what is standard in the US or Europe, and more than a few foreigners have made simple mistakes that have cost them their jobs or their entire companies.

Terrie Lloyd has started more than a dozen companies in Japan over the past 30 years and has hired hundreds of people here. Today Terrie shares a number of personal stories and also offers a lot of practical advice for westerners in Japan who need to hire, manage and retain Japanese staff, either for their own startup or as part of a larger organization.

Of course, we talk about Japan Travel, Terrie’s latest venture, but we also cover the state of Japanese startups in general, how to best raise money from Japanese VCs, and we go over a few real-world examples of how you can protect yourself when things go horribly, horribly wrong.

Transcript

Okay, I want to explain in advance, this one is going to be a little long, but believe me, you are going to be glad you spent the time, and you know, you might even find yourself listening to this particular episode a couple of times. There’s so much good stuff coming.

Terrie Lloyd has started more than a dozen companies in Japan and he has hired hundreds of people over the past 30 years. Now, Terrie and I have known each other for a long time. In fact, when I was first starting out in Japan, I did some programming for one of his companies back in the 90s. I wrote for one of his magazines in the early 2000s, and you know, I’m not sure what took me so long to invite him to sit down and talk, but I’m glad I finally did. Of course, we talked about Japan Travel, Terrie’s latest startup, but our conversation also turns into a brutally practical guide for any foreigner who wants to run a business in Japan. I will warn you in advance, our conversation lacks most of the startup hype and pep talking most founders exude, but you’re about to hear some fantastic real-world advice about how foreigners can hire, manage, and occasionally even fire Japanese staff.

Japanese labor law is well, different than it is in the US or Europe, and more than a few foreigners have made simple mistakes in this area that ended up killing their companies. Terrie has some great advice both on how to attract and to keep Japanese talent, and a few real-world examples of how you can protect yourself when things go horribly, horribly wrong. But you know, Terrie tells that story much better than I can, so let’s get right to the interview.

Tim: So I’m sitting here with Terrie Lloyd, the founder and CEO of Japan Travel and LINC Media, and BiOS and quite a few other companies, so thanks for sitting down with me.

Terrie: It’s my pleasure.

Tim: Yes, I’m amazed how long it’s taken us to get around to doing this interview because we’ve known each other for a couple of decades now.

Terrie: Yes, that’s right, absolutely.

Tim: And I want to talk to you about Japan Travel, but there’s a lot I want to dig into about the ecosystem itself and how it’s changed, and some real practical advice for foreigners doing business here. So let’s talk about Japan Travel. Can you explain how it works? I think it’s a really interesting model.

Terrie: Well, I started off as portal. I’ve been interested in media for a long time as you know, and so I wanted to create a community-driven media brand, basically. The impetus for making Japan Travel, of course, was to help with disaster, and so I wasn’t really thinking too hard about turning it into a business per se. I thought it would be kind of like a good way to contribute to help rebuild Japan. As you recall, back in 2011, I went to meet people looking at the traveling to Japan.

Tim: Oh, I see, so I mean, but you always envisioned that as an inbound travel portal, right?

Terrie: No, actually, originally, I created a piece of software which we called ACQ2 which is a community management platform, and I went out and tried to get funding for it, and it was obvious that nobody really understood what I was trying to do. I don’t know that I understood. So I realized I would have to make something that was more solid that people could identify with, and actually, originally, I started off with a dog site, and then it was called doglovers.jp, and roughly at the same time, of course, the earthquake happened. I had a very powerful dream, actually, and it woke me up. I started writing down furiously what I remember and I decided that I would do something to contribute to help Japan. I’ve always been a firm believer that money follows quality, so if we did a good job, maybe we could turn it into a business. Of course, that’s always in the back of my mind.

Tim: What exactly is the platform? How does it work?

Terrie: Yes, okay, so originally, as I said, we started off trying to build a portal. I’ve always been in the publishing business where we are very concerned about quality, but at the same time, we had all these constraints, and one of the constraints is having to hire people to create the content and so on, and so I decided that I would try to do something more on the community basis by building this whole quality control method. The the earthquake turned out to be kind of like a blessing and a curse. It was a curse because, of course, the damage it caused], but it was a blessing because there were other people like me who felt like they wanted to do something to help Japan. So the first stage, I was running around and emailed friends, my network, basically, of foreigners living in Japan. I must have contacted about 500 people. I had a great response, and so on the basis of that, we started building this community. We ran it on the platform and today, their community is about 30,000 people, so it is quite large.

Tim: And the platform itself allows for crowdsourced content generation with some editorial control and some editorial direction as well, right?

Terrie: Yes, I took two patterns out, actually, which I have successfully received just recently. One was an insight into human behavior, so when you have people who are contributing to a crowd in the cloud, it’s as hard for –

Tim: It’s hard to get that in Japanese, yes.

Terrie: That basically, if you ask them what kind of job they want to do right at the start and they nominate the role out of a pull-out, generally, they will stick to that. So I have people who first signed up as people who created the original content, of course. They are kind of like travel journalists, and then we had people above that who are editors, and people who are fact-checkers and people who are translators, and so on. So each layer, those people kind of stick to their role, so you get this kind of like 360 coverage for each article. You don’t get just one person’s view, you get at least two or three other people on top of them, and by the time you come out of that process, that article is actually transformed.

Tim: So what is the motivation for people to participate? I mean, for writers, I think both you and I can attest to this, writers are willing to write for free to get their ideas out there, to be heard, but editors and fact-checkers, much less so. So what brings them onto a platform?

Terrie: Well, first of all, we have this points and awards system which is kind of like, imagine Facebook rewarded everyone for all the work they do to make it worth all those billions, that’s the first thing, and then secondly, as people become skilled and their reputation goes up, we ask them commercial work. So we have lots of commercial work coming in: regional governments, large corporations, advertising companies, travel agencies, and so on, and so we basically ask those people to do that work.

Tim: Okay, and the first application you used this for was, you mentioned a dog site?

Terrie: Yes, that’s right, for people who were dog lovers, basically.

Tim: Well, what happened with that?

Terrie: Well, I had two sites running in 2013 and Abe got voted into power, then suddenly opened up all the visas, the floodgates for tourism, and the Tourist Act just took off. The dog site was also doing well. In fact, we were number four in the country when we decided to close it down. I just couldn’t afford to run two things at the same time, so I decided to focus on the travel side of things, but I still have the dog lovers domain and at some point, I may actually resume.

Tim: Bring that back to life? Well, the travel industry is an interesting one, particularly with startups in general, so it’s a huge growth industry, one of the few growth industries in Japan, but there seems to be relatively little venture investments in travel. Why is that?

Terrie: Yes, so I have of course, first-hand experience of this. So for the first two or three years, it was just a project. We called it japantourist.jp, and then in 2013, it was obvious that things were going to change, thanks to the government and so on, even though I don’t personally like the current government, but anyway, so basically, I got very lucky. I managed to secure the japantravel.com domain from a lady in the states that was just happenstance, and on the basis of that, I decided to go out and see a bunch of VCs. I saw 25 VCs, and 20 of them told me that the sector was too small.

Tim: Travel? This was what year?

Terrie: This was basically the end of 2014 going into 2015.

Tim: Okay, so it was really – it was already taking off at that point?

Terrie: It was underway, it was underway. We were experiencing 100% growth rates for the previous two years. So that really kind of made me realize that A, there was little sectoral expertise here, and then secondly, those companies that were interested, they had all kinds of other concerns: being a foreigner, whether or not the Olympics would be the end of the inbound travel boom, everyone had a reason to say no. I did actually have one VC who did offer money but the valuation was low enough that I decided to forego that.

Tim: Keep running it yourself?

Terrie: Well, actually, what I did is, I went and approached friends and family, and so now, I have 25 independent investors, a much better valuation and they are all friendly investors, so I don’t have to deal with VC issues yet. Now, at some point, we will still do a series A. At that point, we will have a VC in there, but it has given me a couple extra years to layer in corporate governance controls, systems, that kind of thing.

Tim: This is one of the issues that I get asked about the most in terms of should I bootstrap? Should I rely on friends and family and savings, or should I go out to a VC? So in this case, do you think they just didn’t understand the idea? They didn’t believe that inbound travel is going to be a thing in Japan, or was it just like a herd mentality – no one else was investing in the sector so they didn’t want to either? What was the hangup?

Terrie: Yes, I believe it’s part of it. I certainly don’t fit the mold of what Japanese VCs are looking for. I’m foreign, I’m older, experienced, I won’t roll over at the sniff of money, that kind of thing, and they don’t like that, right? They basically – I mean, it’s human nature, but Japanese VCs, generally speaking, when they anoint somebody, then basically, they expect that person to roll over and do what they say.

Tim: This is something I’ve seen, and I agree with you that Japan is such a hierarchical society, and VCs, by the nature of the fact that they have the money, seem to want to occupy that higher position in the hierarchy.

Terrie: Yes, they do.

Tim: So you feel like your experience and knowledge was actually working against you?

Terrie: I think that it’s threatening for a VC when they are sitting opposite somebody who probably knows a lot more about doing business than they do. I do think that. And then secondly, VCs, it’s again, human nature; they want to make a killing, and one of the – you asked before kind of like what changed. The really noticeable thing that’s changed is that, well, first of all – okay, what hasn’t changed? Japan has always followed the US, and so, in the US, everyone’s going on about billion-dollar companies, unicorns. So I noticed towards the middle of 2015 that people started talking about unicorns all the time, and of course, japantravel.com is not a unicorn, right? It’s a vertical play, not a horizontal play, so it’s all about Japan. Would we ever be worth a billion dollars? Well, maybe in 20-30 years, but that’s certainly not my intent. I want to do an IPO. I want to look like a normal public company and so that’s not enough anymore. So I do find that these guys are basically hyping themselves up. There are, of course, bottom feeders who are the exact opposite, right? And they want to get in too.

Tim: I mean, the vast majority of companies being funded in Japan – and I’m not going to – we don’t have to mention any names – but I mean, the vast majority have no hope of ever being a billion-dollar company.

Terrie: Yes, they don’t. Right, but they play along.

Tim: Were you getting the same reaction from foreign VCs as you were from Japanese, or were you primarily approaching Japanese VCs?

Terrie: I just went off to Japanese VCs, and there was a reason, because it’s called japantravel.com, so I couldn’t imagine that there would be many foreign VCs interested in the Japanese inbound travel market.

Tim: But it seems, with the relative success of Airbnb and the changes to the minpakus, and there’s more and more travel-related startups that have popped up in the last two or three years, it would seem that the environment – well, has the environment changed? Is there more of an investing appetite for travel-related businesses now than there was the last time you went out?

Terrie: I think within the travel space, the real action to be had from a VC point of view and if you are tailoring your company to fit a VC’s perspective, you would have a platform which can go global. You wouldn’t have a vertical play. So you certainly wouldn’t call it japantravel.com.

Tim: Yes, but your core value is this platform you have. It’s not the travel site. The travel platform is one application of it, so were you trying to raise money for that platform?

Terrie: Yes, for the travel platform itself. Yes, not for the software.

Tim: Oh, okay.

Terrie: Yes, yes, and so the travel platform, what I’ve done is that I built it into a vertical play, and so we have the portal, we have a travel agency, and now, we have basically a Japan travel data integration team, so we are integrating all this data in the back end. It won’t be a billion-dollar company. I’m not planning to make it a billion-dollar company. If we do $100 million in 10 years time in sales and revenue, they will be on track, and that is something that I’d be quite comfortable with. It used to be that VCs were actually pretty happy with that kind of production.

Tim: I think those kinds of revenues are much higher than most companies that IPO in Japan, it would seem, in the very top bracket of that.

Terrie: Yes, well, I mean, if we are going to IPO, we will do what everybody else is doing and IPO at $15 or $20 million of revenue with about $3 to $4 million of profit.

Tim: Have you thought about throwing out the point system and making it revolve around a cryptocurrency or a token-based system?

Terrie: Yes, I have, actually. The thing about tokens and cryptocurrencies is that you need to make it liquid. If it’s not liquid, then people won’t buy it. Well, they may buy it, they may buy it if I did an ICO in the next six weeks, but anyway, I’m not going that direction.

Tim: Yes, yes, the iron is hot right now.

Terrie: Yes, that’s right, but frankly speaking, it needs to be a fairly broad and liquid market before people can really justify jumping in, and I don’t see 30,000 people being liquid enough.

Tim: But isn’t the same thing true of point systems in general though? I don’t see a huge fundamental difference between exchanging points and exchanging tokens in terms of liquidity within the platform itself.

Terrie: Actually, it’s extremely similar. It is extremely similar. The difference is, point system is very easy to manage, and not complicated technically at all, whereas tokens and so on are.

Tim: Yes, it requires – it’s not that complex from the provider side but we have to ask a lot of the people who participate in your marketplace to sign up and get the wallets, and jump through a lot of hurdles.

Terrie: Right, I mean, you are talking an extra 30 to 50 million yen of software development to be able to implement that kind of sub system. For us, it’s only one of probably half a dozen systems that we run in the company. For now, I’ve decided to ignore it. It is interesting but it’s hard to understand how you could apply an ICO to a real business versus one which is kind of more platformish and/or revolving around coins themselves.

Tim: Well, I think it’s interesting to note that the vast majority of ICOs are by companies that aren’t going to be launching a product for more than a year. I think a lot of these companies or perhaps a lot of their investors are going to discover the same thing in about a year or now when they have to go into operations with a VC system.

Terrie: Right, and then so that means the company will implode, and I mean, I didn’t build a company to just gamble it away. Basically, I want to be successful and be self-sustaining.

Tim: Yes, I want to go back to the idea we were throwing around before about Japanese investors perhaps being unwilling to invest in entrepreneurs with age and experience. So you have been creating companies here for 25 years-plus?

Terrie: Yes, 30.

Tim: 30 years?

Terrie: 30 years, yes.

Tim: I guess that’s right. This is sort of our third Japanese economic bubble.

Terrie: It is, indeed. And now, this is company number 17 for me.

Tim: Oh my gosh.

Terrie: Here in Japan.

Tim: Some things must have gotten easier. So even though you decided to go with the more traditional kind of friends and family route, some things must have gotten better in terms of investment and starting companies.

Terrie: Yes, certainly, there is one really notable thing that has improved and that’s the ability to be able to decentralize. So it used to be, when we set up a company, we would have to have all the resources on-premise, and that’s no longer the case, right? So we can do our hosting somewhere, we can do our technical development somewhere else, we can have our salespeople somewhere else again. That’s really a huge difference between now and even five years ago.

Tim: Is that just in terms of being able to control costs or to find the right people, or scale go up and down as needed?

Terrie: Yes, all of the above.

Tim: All of the above?

Terrie: I’ll give you an example. The third leg to our platform in Japan Travel was this IT business, basically, where we take data which is being held by big Japanese companies who don’t know how to target foreign travelers, and so they need somebody like us who actually has a portal and also is licensed, so as we go around and talking to these various Japanese companies, we mentioned this magic word, API, right? A contraction, right, abbreviation. And then basically, they don’t know what it is, and then as I started asking around, I realized that the sharing economy has completely missed Japan in certain sectors, particularly the B2B sector.

Tim: Yes, it is not a culture of open data and open access to information here.

Terrie: There isn’t because if you opened a kimono, you got attacked, right? So basically, it is a built-in cultural thing not to share. I mean, if you want to do a deal with Toyota, for example, Toyota will invest in you, and then over a couple of generations ingest you into their conglomerate, right? You might still have the family name, you may still have family shares, but your system is going to be Toyota system.

Tim: And they will fit you into that hierarchy somehow.

Terrie: And that permeates right through society, and so of course, there are some sharing economy things going on, but if you look, even those companies want to keep it to themselves, and Rakuten is a great example. Rakuten is a sharing economy type company, but if you try to do a deal with Rakuten, you will find that it’s a big black hole and basically, they want to control it and you are just a kind of like a subcontractor.

Tim: This is something that at least I’ve seen, but I really want to hear your perspective on it, so comparing doing business as a startup in the dotcom era, and doing it now, so certainly, there are some big clients who operate. They want to control everything and you get pushed down for three levels of subcontractor who will try to extract as much information from you as possible and give up as little as possible, but in like 1999, it seemed to me that all the companies were that way and it seems that now, there’s a lot more companies who are willing to engage directly with startups and willing to engage directly with new companies. Have you found that as well or am I just seeing a very tiny sliver of the Japan economy here?

Terrie: I think there’s one litmus test, do they have an API? If they don’t have an API, they are not a sharing economy company.

Tim: Well, okay, that’s the true. But there’s a lot of like technical legacy that these companies are bringing with them. So for example, the financial services agency is putting a huge amount of pressure on Japanese banks to build APIs and to share data with startups.

Terrie: Yes, like Moneytree, for example.

Tim: Yes, like Moneytree is one of the companies taking advantage of that.

Terrie: You know, Moneytree, I think, right place, right time, great connections, great execution, great company, right? They are not normal, and I’m sure if you talk to the Moneytree guys, you will find that those banks are still kicking and screaming about what data they’re going to actually open up. Moneytree, as I understand it is mostly about personal finance. So is the customer asking the bank for their information?

Tim: Well, they actually – Moneytree was a bit ahead of the game, they’ve been on the show. They were explaining that they launched their service before the existence of these APIs, and the APIs right now are still minimal, so they had to work around it.

Terrie: Okay.

Tim: Do you see any movement? So in the case of the banks the government is forcing to open up, in the case of the energy sector, the government is forcing them to open up and these are highly regulated industries that the government can force them to do that, do you see this happening anywhere else?

Terrie: Even in the ones that are being forced open, there are no APIs, right, to speak of. Do I see it anywhere else? You know, this is a win as of what’s going on abroad, and the opportunity for those of us who are not Japanese or who are Japanese but can access foreign technology and know how is to find the beachheads. Now, the best beachheads in Japan are always the ones where foreigners have the dominant hand, i.e., the customers are foreign, the money comes from abroad, the things that have to be delivered involves some foreign aspect, so as soon as you have that kind of like outside-of-the-castle type activity, that is an opportunity, and so travel is very much in that space, and that’s actually one reason why I doubled down on travel and gave up on the dogs.

Tim: Even within travel, it seems that a lot of the Japanese travel agencies aren’t particularly anxious to engage with foreign companies. A lot of the travel, the local travel boards, the local travel bureaus, or even the national travel bureaus don’t really seem to have a lot of foreign input into their decisions.

Terrie: Yes, yes, so that’s like three questions in one.

Tim: Okay, yes, I kind of – go ahead, but yes.

Terrie: Okay, so first of all, the way the market operates, so the Japanese government said last year, there were roughly about 30 billion US dollars all tourists spend in Japan, but actually, the amount of spending in Japan by tourists is only about roughly, my guess, about half of the actual spent. Why? Because a lot of people were spending money before they come to Japan. So they are booking through booking.com and various other agencies, right? So that money doesn’t come to Japan directly. It goes indirectly, and in fact, if you think about it, those commissions which are going to booking.com and Expedia and the others, they are kind of like a tax in a way, a foreign company tax. Anyway, it’s huge. It’s a huge business.

Tim: Well, it’s money that doesn’t get into the Japanese economy.

Terrie: It does, eventually because Expedia has to pay the hotels but the point is, they control everything and they take their 20%, right? Or 25%, it’s really a massive amount of money. So when you have an economy and a sector which is worth maybe 50, 60 billion US Dollars, well, basically, that is a pretty interesting business. So the Japanese travel agencies, the JTBs, the KNTs the Club Tourisms, those are sort of companies, you are right that they are not on the surface, they don’t seem to be capable with foreign tourists, they don’t seem to be out there doing the same sort of high grade job that Expedia and booking.com are doing, but in fact, behind the scenes, they have a great wholesale business because what they do have is, of course, relationships with all these hotels. Now, booking.com is a bit different. Booking.com goes in and gets its own hotels, and in fact, they have spent millions, must be tens of millions of dollars over the last five or 10 years acquiring those hotels. They have by far the biggest inventory of hotels in Japan to offer to foreigners. In fact, about double what the Japanese may just offer which is amazing, actually. So these large companies, they do have business, but it’s all subterranean and you can’t see it.

Tim: Well, why haven’t we seen the kind of disruption in the Japan travel industry that we have seen in Europe or in the United States? For example, I mean, Expedia is here, booking.com is here, but are they primarily focused on foreign tourists coming into Japan or do they have a significant amount of activity in the domestic travel as well?

Terrie: Okay, well, that’s a good question. So basically, the Japanese tourism economy is divided into three. There is the inbound, which, of course, we related to. There’s the outbound which is Japanese going abroad, and there’s domestic. By far, the biggest tourism sector is domestic. I forget exactly the number but it’s something like 300 million trips are taken a year in Japan domestically versus about 17 million trips taken each year as outbound, and of course, this year, it will be about 27 million inbound. So the domestic space is 10 times larger. Of course, the spend is smaller, but nonetheless, 10 times larger market. So the likes of KNT and JTB and so on, they are pretty satisfied with what they are doing just with the domestic economy. Is booking.com making much progress into that space? The answer is probably not much. A little bit but not that much. There are plenty of other companies out there, Jtrip and Ikkyu, and Rakuten Travel, and so on who have much closer integration, tighter integration with the hotels. They may own the system that hotel uses to do the bookings, or they may own the aggregator just above it, or they may own some kind of channel marketing company. So anyway, that’s a pretty well-developed infrastructure and those companies have enough revenue coming out of there that they can stay where they are, but they are not growing.

Tim: Yes, so those companies, meaning the JTBs or the challengers, the Rakutens?

Terrie: Well, both. So consumers, generally speaking, of course, these days are shopping online. JTB has Japanican for example, but Japanican has a big problem in that they have to get their inventory out of JTB which means their prices are quite high, and so Rakuten Travel and Ikkyu and the others, they actually do a much better job of price control. So where are the consumers going to go? Well, they’re going to go with those online companies. But for the JTBs, well, of course, they have these huge government projects. Sports, events at a prefectural level, marathons or whatever. They make tons and tons of money out of that kind of thing.

Tim: Still, it seems surprising. Well, in terms of why there hasn’t been a disruption, does it get back to not necessarily the lack of APIs but the lack of digital data, is JTB, is this inventory all being managed on paper? I can’t understand.

Terrie: I can’t really say what I know about JTB but I can tell you, it’s one of the world’s most inefficient companies].

Tim: This does not surprise me. Just because I mean, for example, real estate in Japan, it’s ripe for disruption but so much of the inventory management is done with paper and fax, so there is no central database, let alone APis. Is travel and hotel booking, is it similar?

Terrie: It is in a way because they are both licensed activities, and so whenever you get a license, a subset of the economy, you have, of course, everything is led by regulation, and if the regulations require you to have paper, then you got to have paper. So a classic example is, why do Japanese hotels still require guests to fill out a little paper slip? It’s crazy, right? I mean, there has been talk recently of the Japanese government issuing cards, like an ID card for tourists, and then they’ll make it palatable by offering discounts when you buy stuff and that sort of thing as well.

Tim: Yes, so some industries obviously move faster than others, but somebody who has been doing business here as a startup founder for 30 years, do you think that either Japanese consumers or Japanese businesses are more likely more willing to take risks on new companies and new brands, or is that something you don’t think has changed much?

Terrie: I don’t think it’s really changed. Of course, a tool is a tool, and so if you have something that somebody sees as a tool, as long as there’s not too much risk involved, they will move quickly and they will use that tool, but the fact is that – look, I’ve been around the track, well, 17 times, seven earn outs of my own, one where I did it for somebody else. I have found that you basically have to own your own ecosystem. You have to own your own clients, you have to own your own method of delivery, you have to certainly own your own technology. So there’s kind of like a minimum investment that has to be made in order to be able to develop an opportunity, and as a foreigner in particular, you don’t have the networks, you don’t have the relationships, and you just don’t fit. So that’s okay. There’s still plenty of opportunities for foreigners to make business here, but almost all of the foreigners I know invented something. They found a niche and they made something completely new. They didn’t go in and disrupt some existing sector.

Tim: So when you are saying inventing something, do you mean a particular patentable product or a business model?

Terrie: They may have set a trend. Take James Gow for example who did FX online and had a fantastic 200 million dollar buyout. He did that what, 10 years, 10, 12 years? He was on the leading edge of something, right? Now, as I understand it, his trades were all executed by a firm back in the UK, so he didn’t necessarily invent that but he certainly spent a lot of time and energy on the front end and making that user-friendly, and until then, nobody had a thought that users needed to trade FX, let alone do it in a way that was kind of like the stock trading companies that were in the states 10 years earlier.

Tim: That’s an interesting example but it seems, to kind of go against what you were saying before about foreigners have an advantage when they are focusing on their foreignness, either bringing in new technology or doing something that the Japanese can’t do, and he seems like a good example of someone who focused on the Japanese market, because most of his customers are Japanese and –

Terrie: Yes, the tech came from the UK and the trades came from the UK, so he was able to do something that other people weren’t able to do at that time.

Tim: Okay, so it wasn’t technically possible or at least technically feasible to do that within Japan?

Terrie: Yes, that’s correct. Yes, and so in the UK, they were much more advanced, and so he was able to sort of take that technology and replicate it, and serve it up in Japanese format here in Japan. In fact, there are loads and loads of entrepreneurs who have used very similar techniques, and so when I say invent something, it may not be invent out of thin air. It might be that they have invented a new trend or a new interface or something like that. I mean, Masayoshi Son, the way that he got Yahoo BB and running, if you remember those parasol stations we used to have – the parasol retailing marketing he used to do in front of train stations.

Tim: Yes, the kiosks.

Terrie: The kiosks, right? Which were probably really illegal at the time but anyway, he did it. He was able to do that because he found this router which was highly configurable, which was made in the states, and that router actually enabled Yahoo BB’s business right at the start and got the broadband revolution up and running here in Japan. Without that, he wouldn’t have been able to achieve it, so I think that Masayoshi Son is a great example of somebody who leverages foreign technology, foreignness, and the whole intra border thing.

Tim: Yes, yes, I think that is true. It’s unique to play to your strengths, whatever they might be, and as a foreigner in Japan, access to and understanding a foreign market is certainly one of those strengths.

Terrie: Well, like us for example, so okay, I’m an experienced entrepreneur. I know what is needed but still, I rely on something foreign in order to be able to leverage my business. So for example, about two years ago, I was asked by a software company in the states to do a project for them and that software company happened to be a company that did APIs. So I learned a lot about APIs and then I learned about this whole sharing economy and what the underpinning infrastructure was which is APIs, and then I realized, wait a minute, there’s none of these here in Japan. So that’s actually why I decided to set up this data integration team, and so Japan Travel, because it perfectly fits the vertical, and it’s a huge gap and a huge opportunity.

Tim: Playing to the strengths of the foreigner makes a lot of sense in terms of technology and business opportunity. What’s been your approach over the years to recruiting staff? Because that’s one of the most difficult challenges faced by foreign entrepreneurs here.

Terrie: Yes, I’ve written some Terrie’s Takes –

Tim: Quite a few of them, yes.

Terrie: Yes, that’s right. Things haven’t really changed in terms of hiring staff. It’s still difficult. I have found that over the last 30 years, young Japanese tend to be more influenced by the quality of leadership of a company these days rather than the branding. When it comes straight out of university, their mother is telling them what to do, right?

Tim: Yes, time to go work at Nomora or something].

Terrie: Yes, exactly, but there was a statistic, on average, young Japanese under 30 have switched jobs three times, right? So people in their late twenties and early thirties really are starting to think about their value system, what’s important for them. Now, those people who are on a financial fast track, of course, they will just stay locked into that and focus on the money, but because Japanese companies are so parsimonious with paying salaries to young people, there are a lot of young people that money isn’t the major motivator anymore.

Tim: So what is the ideal age range, like late 20s, early 30s? Is that where you target most of your recruit?

Terrie: I do, yes. I try to find people who have already been able to draw their own conclusions about their lives and they have some confidence about where they want to go and what they want to do, and not just on the money track. I mean, especially as a startup, we don’t have a lot of money to throw around, so people have to have a different value system. There’s a whole Maslow’s Hierarchy of Needs at work, right? For me, running a small startup, things that matter for me are people to produce the content. Well, that’s in the community. People to sell and monetize the content. Well, that’s bilingual Japanese mostly, and then people to build the systems. So to build the systems, as I was mentioning before, the solution these days is to do it abroad. So I do have somebody here at all times because you have to gap-fill, but basically, most of my trusted and senior people are in the technology space or somewhere else.

Tim: Were those people that worked for you here have moved or are they people that you recruited from abroad to begin with?

Terrie: I may have recruited them from abroad but I have a method which is that I bring people in for at least a year to two years, and why? Because I want to know who they are and I want them to know who we are. It really makes a big difference, the retention factor, throughput when they go back home, that kind of thing. If they know who they’re working for, they feel the some kind of like connection and they want to do a good job and they want to perform.

Tim: What you said before about being attracted to the quality of leadership makes sense, but taking one step back from that in the process, as a startup, nobody knows your brand, nobody knows your name, once they get to know you, they can say, “Okay, I’d like to work for this person,” or “I agree with this person’s vision,” but what’s been your strategy to kind of stand out above the noise of all of the – well, now, thousands of startups that are trying to hire in tens of thousands of kind of like mid-sized businesses that are trying to hire that same demographic of people?

Terrie: Yes, this goes to leadership, right? As a leader of a company, fundamentally, you have to be noticeable. You have to be public, you have to provide a very clear indication of what your values and value system is. When I create a website, I always have a message from the president, like every Japanese company does, but I try to make it come from the heart, not some flowery thing that looks like it might have substance but you can’t actually pin it down. I’m talking about overcoming hardship and how to be successful in Japan as a non-Japanese and that kind of thing, and that really strikes a chord, not only with foreigners but also with Japanese. There are many Japanese bilinguals who have invested years of their lives to acquire language skills. They may have studied abroad, they may have just gone to an English school here in Japan, and for them, to make that investment, that’s an emotional thing, and so they really feel their destiny is somehow related to international companies, and if you can be that international company for them, then you can have a very loyal and highly productive person.

Tim: So with 17 companies that founded over the last 30 years or so –

Terrie: Yes, not all successful.

Tim: Well, no. They never are.

Terrie: I had some really flaming heaps of it wrong.

Tim: Are you generally hiring someone for a particular role in a particular company or are you trying to hire people and get them on as a long-term career path through multiple endeavors?

Terrie: So again, very good question coming from somebody who knows that problem. My general attitude is that I hire on personality. It’s difficult because sometimes, the cash flow doesn’t fit, right? But I really want that person. So if I meet somebody who seems to be a good fit, I will try to make space for them. It’s not very often that I can’t do that. Having said that, every now and again, you will run into an emergency, right, where you just have to have somebody. It depends what kind of emergency it is. Generally, I try to keep my emergencies more on the technical side because it is easier to go get technical resources especially if you go abroad, and so I’ve always got an ace up my sleeve, if you like, in terms of technical resources.

Tim: As a foreign startup founder in Japan hiring Japanese staff, what kind of turnover should they expect?

Terrie: The ideal turnover is none.

Tim: Right, but is that a reasonable expectation?

Terrie: Well, we are four years old and I haven’t lost anyone I don’t want to lose, so I do fire people occasionally, not very often, but most of my Japanese staff had been with me since they joined, meaning they haven’t left. Well, they can see me working hard, that’s important.

Tim: No, it is, it is.

Terrie: When Japanese staff can see the founder working as hard as they are, it makes them feel better. This may make you laugh but over the last year, I got very interested in making sourdough bread. I bring bread into the office for my staff. It’s a kind of like, I’m almost like feeding them, you know that kind of thing? And because sourdough has got kind of a technical aspect, right? So many of my Japanese staff never ate sourdough before. Yes, I don’t like going drinking, so I don’t do that side of things but I still bond in the way I bond as my own personal staff which is the sourdough bread.

Tim: Right, well, I think that kind of interaction and building a relationship has to be a personal style. I mean, granted there are consulting firms that tell you how to do that, but I don’t think it will stick if it’s someone else’s playbook.

Terrie: Oh, there’s a lot of people who do it just by drinking, and to drink with people in order to bond is extremely time-consuming. I think that as a foreigner in Japan, as soon as you show your human side, then Japanese staff, even if they can’t really communicate that well with you, basically, they start seeing you as a friend, and they want to stay and they want to work hard and they want to do the best they can, and there is one Golden Rule in starting and running companies, it’s not loss of profits that kills a company; it’s cash flow, the inability to be able to pay salaries at the end of the month is far worse than if you were just simply losing money on a yearly basis.

Tim: Okay, that’s – yes, that’s crazy. I think kind of the flip side to that employee loyalty is that in Japan, it can be really difficult to get rid of bad employees who don’t want to leave, and a lot of foreign founders don’t realize this until it’s far too late, and you have written a lot of really good pieces on this, and what’s your best advice for foreign founders to keep themselves out of trouble in this regard?

Terrie: If you are a startup, you’re probably not making money, and if you’re not making money, actually, it is legal from an economic standpoint to let somebody go. So you can say the company can’t afford it, we might go out of business if we don’t let this person go. Of course, you’re going to have a fight on your hands if the person decides to go to the labor standards office or elsewhere, but it is a reasonable and sustainable argument.

Tim: And so actually, I guess we should probably explain for our foreign listeners that Japanese labor law is incredibly favorable towards the employee.

Terrie: There are actually four layers of law.

Tim: And the company has to show a very narrow range of cause for letting someone go, like incompetence is not –

Terrie: Incompetence is not a legitimate cause, no. Best cause is financial hardship. So anyway, that’s one way. Another way is that a lot of people don’t know that it is legal, again under financial hardship, to reduce salaries by 10% or so, so if you did this every six months, at some point, that person will get the message.

Tim: I imagine so.

Terrie: Right? So that’s another way. When you separate from somebody, it’s not really an issue of whether it’s hard to get rid of them. It’s an issue of just how much punishment you have to take in order to get rid of them. So if you have somebody who is a problem, you may use some more creative techniques to try to let them go. So one of the things that I use, and it’s not very often because I try not to make too many mistakes, but peer group pressure in Japan is something that most Japanese are not capable of withstanding. If their peer group hates them, then basically, they will leave.

Tim: They will leave?

Terrie: And so, therefore, what I’ve done several times, not recently but certainly in the last 10 years, is that I’ve gone to the peer group and I will say, “Okay, I can’t deal with this person. I really want to fire them but I’ll let you guys keep them if you can fix them.”

Tim: Interesting.

Terrie: And so usually, I will go to a manager who is Japanese or somebody who is a strong opinion leader and then I will give them some time and I will let them take the person out of the office and counsel them themselves, and you know what happens? Basically, that peer group gets behind the person and tries to help them. If the person improves, then you fixed the problem. Yes, they may not be an outstanding player, they may just be somebody who just meets the grade but that’s fine, as long as they are not negatively impacting the company, but if they don’t improve, if they have really a systemic problem, some personality disorder or something else, that group will turn against the person and make them leave themselves.

Tim: Interesting, and from your experience over the last couple of decades, when you have to resort to that tactic, do you find usually, the managers and the peer groups are saying, “Okay, let’s work on it, see if we can salvage this,” or they also agree that this person is not working out then it would be best for all concerned if we let them go?

Terrie: I would say that it is a funnel, so at the top of the funnel, the widest point, you have lots of communication going on with your team, leaders, and they already know what’s going on. So actually, you wouldn’t have to use this tactic because everybody knows and agrees this person needs to leave, but as you narrow down the funnel, you’ve got these rare cases, people who have one thing that they do really well but everything else sucks, and so you really don’t want that person around but that one thing could be useful.

Tim: Usually, those employees have engineered that one thing so that they become indispensable.

Terrie: Absolutely. Yes, that’s right, they may have one big client where their friends work there, for example, and so if you fire the person, you fire the client. That’s a very common occurrence, actually. So it’s really up to – if I don’t want to deal with that person, I’ll make the team deal with it. If the team doesn’t want to deal with a person, then everyone is in agreeance that they need to go in which case, okay, I may or may not have a fight with the person. I had been to court three or four times over letting people go. Usually, my experience has been that courts want a 50/50 deal. So you offer low, they offer high, and it comes out somewhere in between. It’s all a big waste of time and money, but sometimes, it’s necessary to set an example.

Tim: And it takes a long time. Well, how long does it take for something like that to wind its way through the court system?

Terrie: Well, let’s just go through the program. So first of all, if somebody is not performing, I’ll just talk to them myself, right? And then if they still don’t perform, then we’ve got a three-month program, so you give them a warning – oh sorry, counseling, then a warning, and then let them go, and then if they are particularly tenacious, then you are working on the team, they would take about six months, and then if you want to go to labor court, well, you would have fired them in one month so they are not around, but then the court case will come up. That might take three to six months to actually come up, and then the actual court case itself will take roughly about a year to 18 months. I do have one case, and I wrote about this in Terrie’s Take, where a guy got drunk and punched out a cab driver. Anyway, he got thrown in jail. The police wouldn’t let him go until he paid some consolation fee to the taxi driver, otherwise, he was going to court, which he did after about two weeks. The trouble is, he had some particular keys for the server rooms for a bank that I was doing business with, and those had to be turned in every 24 hours. The police were keeping the keys as evidence, so of course, I fired his ass, and then he took me to court, okay, fine, everything was going sort of okay, and then he came up with this really great strategy. I mean, he was really a smart guy. He started claiming that he wasn’t actually a freelance employee. He was actually a real employee even though he had used a company name and sent me invoices and everything else, and this is this grey line between outsourced and insourced people, right? Anyway, so I looked like I was going to lose this court case. So actually, I challenged the judge, actually. In retrospect, I’d never do it now. Anyway, I asked two things. One, I said, “Can I blog about this?” And he went, “What?” And then secondly, I just made it really clear at the end I was super unhappy because this wasn’t about whether he was an employee, it was about whether he punched out a cab driver and wound up in jail, for God’s sake. The judge told me that well, if it doesn’t get resolved here, it has to go to high court, and I sensed my opportunity, and that’s why I asked him, “Oh, if it goes to the high court, how long will the case take?” He said, “At least five years if you guys don’t agree,” and I said to him, “I’ll take the high court.” So anyway, so at the other side, they realized okay, let’s just settle, so we did, we settled.

Tim: Well, I think a lot of the Japanese legal system is designed to make it more painful for everyone to pursue cases and to settle.

Terrie: That’s absolutely what it’s all about. It’s a great system, actually, if you think about it. There’s lots of grey – you never know where you stand, the guys behind the bench have all the power, absolutely, 100%, and nobody can ever second-guess of them. It’s a really great system.

Tim: But in this case, how on Earth is there any doubt whether he’s an employee or not? There’s employment contracts versus monthly invoices.

Terrie: Remember I was saying there were four layers of law? So first of all, we have the constitution which guarantees the right to work. So you can’t write a contract that stops a person from taking a job. The second level is the labor law itself, which defines how much time off people get and what categories there are, and how to treat women and pregnant ladies and that kind of thing, not employing kids, whatever. The third level is group bargaining. It’s a law that every company with more than 10 employees has to have a group-negotiated contract which is displayed publicly. Most companies never do this but it is supposed to be done, and so there’s kind of like a pseudo union type arrangement. So I often tell companies that are just getting started, get that contract with your first employee, because then you only have to negotiate with one person. So most companies don’t even know about – well, that’s illegal, and that goes into the minutia of the labor law and then all the extra benefits that the company offers, and then under that, number four, is the employment contract, the weakest contract of all. The only thing that an employment contract is good for is to set kind of like a standard of expected behavior, and actually, I mean, 99% of law-abiding Japanese follow that labor contract to the letter, but 1% don’t because they know that their contract doesn’t have any power. So anyway, so you’ve got these four levels, and of course, westerners or foreigners in general think, “Oh, employment contract, I got everything tidied up,” that’s the weakest document you can possibly have.

Tim: Right, because there’s so much law – well, factual case law and court decisions that supersedes whatever might be in that contract.

Terrie: Well, there’s the constitution. Every labor contract tries to print in a non-compete, right, of some kind?

Tim: Right, those aren’t enforceable.

Terrie: But that’s the point, right?

Tim: So in this case, was he claiming that he was an employee despite the fact he didn’t have a contract?

Terrie: Correct.

Tim: Okay.

Terrie: Actually, he had a contract but he had a freelancer contract, yes, a subcontractor contract.

Tim: Okay, I guess as a foreigner trying to navigate this vague and grayscale vine field, is it best just to document everything?

Terrie: Well, actually, Japan has this interesting subculture of advisors. For HR, they’re called sharoshi and basically, you can have one of these guys for 10,000 Yen an hour, so what you can do is you can say, “Look, this is the way I want to make my contract. You tell me what I can’t do and how I should fix it.” What I do is I use boilerplate from the States, then I write down what I want out of that, and then I send it to a Japanese law firm and I say, “Okay, tell me which parts can’t be done in Japan and how I should do it,” and then they fix it.

Tim: Yes, yes. Legal advice in Japan is relatively inexpensive compared to what you pay in the States.

Terrie: Yes, the problem is that legal advice in Japan doesn’t give you advice. They do the opposite. They tell you what you can and can’t do based on your questions. If you don’t know the right questions to ask, actually, you won’t get legal advice.

Tim: Yes, they will tell you if you’re in compliance with the best strategy for operating within the legal framework.

Terrie: Exactly, so I would say that the harshest legal environment in the world would have to be the US, and so therefore, if I take a US document and show it to a Japanese, I’ve already started from a pretty black and white firm foundation base, right? They just need to tackle the bits that go against Japanese Constitution or the labor law, or whatever it happens to be.

Tim: Getting back to startups, and the government talks a lot about supporting startups and making changes. What are the most important structural improvements we’ve seen over the last 30 years?

Terrie: Well, deregulation of internet and telecoms. Before 1990, I think April, you couldn’t hire a foreigner unless you were making 50 million yen of revenue for every foreigner you wanted to hire, and then after 1990, suddenly, you could have as many foreigners as you want. A lot of people don’t realize that Japan actually has an extremely open border for skilled foreigners. Anyone can come. Yes, this is irregardless of all this new stuff that are going on about as an employer here in Japan, if I want somebody from Bangladesh, India, or Vietnam, as long as he went to or she went to a decent university, I can hire them. It might take me a year but I can get them. I don’t have to go through all the hoops that employer would have to do in the US. It wouldn’t be weird if startups came to Japan because it was easier to get developing-country engineers into Japan than it would be to get them into their own country.

Tim: Well, in fact, just a couple of weeks ago, Sandeep Casi was on the show and he mentioned the reason that his startup is headquartered in Tokyo rather than San Francisco is, some of his co-founders couldn’t get visas.

Terrie: Yes, there you have it, see?

Tim: So it might be something we’ll see more of.

Terrie: If there is an increase in venture business in Japan, I think it will be despite the system, and so you’re asking me about structural changes in whether that will make a big difference. I’m saying, well, maybe it’s nothing to contribute what the government does directly, but there’s this indirect thing about allowing porous borders and allowing people to stay here as long as they can earn enough money, well, that’s a good thing, and suddenly, Japan needs it, and whether or not the target market is in Japan or whether it’s the rest of Asia and it’s just like Japan is a big US aircraft carrier, who cares? They are still consuming in Japan and they are still contributing to the tax base here.

Tim: Yes, it is something a lot of people are surprised at because Japan does have a very low immigrant population, but for high-skilled labor, it is very easy to come and work in Japan.

Terrie: It is, but the thing is that, of course, there’s this natural reluctance by Japanese companies to hire foreigners, right? Unless they speak fluent Japanese. The hurdle isn’t immigration; the hurdle is trying to get a job, but if you’ve got a situation where you’ve gotta find an entrepreneur who’s hiring in people to service some outside market, then you’re in business.

Tim: Well, and as of, I believe it was two years ago, they created this kind of entrepreneur visa where you can sponsor yourself for, I believe, it’s six months before incorporation.

Terrie: Yes, right. Well, you know, that’s really just a nuance, to be honest, because the business manager visa was really the breakthrough. In a business manager visa, you can get three years on that and you don’t actually have to put any money in or hire any people. You have to show that you are going to do it but you don’t actually have to have crossed the line yet, so that means that you can get the visa first thing across the line, or spend three years getting across the line.

Tim: That’s a long time to do business development.

Terrie: It’s a long time to do business development. It’s a great back door, and there’s no reason for people not to be able to scrape together at least $50,000 to get in here.

Tim: Before we wrap up, I want to ask you what I call my magic wand question, and that’s if I give you a magic wand and I told you that you can change one thing about Japan, anything at all – the education system, the way people think about risk, the language ability, anything at all to make it better for startups in Japan, what would you change?

Terrie: That’s a really good question. If you want to change the way people think, the easiest that is certainly a long-term view is to change the education system.

Tim: How would you change it?

Terrie: Well, you got to be careful what you wish for. So if you wish for too much westernization, you will wind up with a westernized country which may start packing guns and everything else, right? Certainly, I would recognize the individual more. I would value individual contributions and more. The Japanese have this kind of weird personality flip when they go to university. Before they go to university, they’re in the socialist society. All my kids went to Japanese schools at some point or other. Whenever they had a sports day, they were never winners. They were only fighting spirit awards which everyone got, and the kids that can’t keep up with the class still graduated at the end of the year. How is that possible, right? Because they look after each other. As soon as they go to university and to corporate life, their social value is there but suddenly, there are confronted with this beast called capitalism where they have to make money and they have to get results.

Tim: That’s really interesting because I think the Japanese large corporations, 30 years ago, were just as socialist as the – or maybe we have to go back 40 years ago – were just as socialist as the education system where it was promotion was seniority-based and you have a job for life, it was just everyone working with the team and supporting each other. Now, corporate Japan is no longer like that.

Terrie: Well, corporate Japan also employs about 15% of the workforce, so for the other 85% which is probably more relevant to us as small entrepreneurs, they are confronted with this capitalist beast and it’s a huge shock for them, and so for some people, they go into protective mode, other people try to grow with it, other people become kind of like mentally disturbed. There are all these pressures that are coming out of this sudden change of attitude and losing the protective cover.

Tim: The whole subculture of otaku is people who just couldn’t adapt to that change and decided to check out of life.

Terrie: That’s right, that’s right. If Japan wants to survive as a global entity, to forget about all the harmony within Japan, individualism has to be recognized. You have to stop this situation where intelligent Japanese leave the country and go to America or somewhere else to fulfill their potential. That’s ridiculous. Why is the country giving up its best and brightest?

Tim: Have you seen any motions in that direction in Japanese education?

Terrie: It’s pretty disappointing.

Tim: Is it? Okay. Well, listen, Terrie. I have no idea how I’m going to edit this down to a reasonable length.

Terrie: Make it two.

Tim: But thanks so much for sitting down with me.

Terrie: Great. Okay, thank you.

And we’re back.

Terrie’s advice on recruiting, hiring, and when you have to, firing Japanese employees is great, and the importance of peer pressure and peer support can’t really be overstated. You know, I can’t think of any foreigner in Japan who has been through more startup boom and bust cycles with his own money thanTerrie has, and there’s not much more I have to add to the advice he gave on hiring and firing.

Terrie’s point about the closed nature of Japanese data and their unwillingness to support APIs is an interesting one. On one hand, I think there’s a bit of a generational shift in the attitudes towards open data and APIs with newer, younger companies being far more supportive of the concept. Even in America, however, APIs are profoundly political and strategic things. Facebook and Linkedin, for example, have opened up there APIs to draw in users from other platforms, and then close them off once the users migrated. In fact, both Facebook and Linkedin have gone so far as to sue other startups for using their so-called open and published APIs for a business case that they disapproved of. Open data and open APIs are both wonderful things, but in today’s world, all private APIs should be viewed with suspicion.

If you’ve got a story about APIs or hiring staff in Japan, Terrie and I would love to hear from you. So come by disruptingjapan/show110 and tell us about it. When you get to the site, you will see all the links and notes that Terrie and I talked about and much, much more in the resources section of the post.

And most of all, thanks for listening, and thank you for letting people interested in Japanese startups know about the show.

This episode should be required listening for all executives – entrepreneurs and intrapreneurs alike – who regularly deal with delicate issues involving problematic employees in Japan. The advice on sourcing talent is equally useful. I hope there is a sequel episode in the future.

Thanks for listening. I might make a followup episode. I was worried about the length of this one being around an hour, but the original conversation was about an hour and forty-five minutes. There was so much good information. It was hard to edit it down. I’m glad you enjoyed it.

Thanks Tim. What a fantastic podcast ! It was great to hear two foreign Japan veterans talking through some great cultural challenges with doing business in Japan. A follow up podcast is absolute must with Terrie.